Amazon and Google Are Taking Over Cities. The Smartest Startups Are Going Virtual

Command Shift: Opting out of geography offers startups the best of both worlds--a deeper and cheaper talent pool.

In the late winter of 2012, Clark Valberg had what he thought was a pretty good startup idea--an app for collaboration on designs across teams and companies--and a nice chunk of seed funding to get it going.

There was just one problem. In New York City, where he lived, it had recently become prohibitively expensive to hire software engineers, thanks to Google.

After spending $1.9 billion on a Manhattan office building in 2010, the Silicon Valley giant was doing everything in its considerable power to fill it with coders. "I found myself faced with the existential crisis of having countless coffees and cocktails with engineers who were also interviewing with Google," Valberg says. After weeks of courtship, he might make an offer, only to find out he'd been outbid by a decimal point or two.

Forced to compete with time and money he didn't have, Valberg asked himself: "What's the hack? How do I care less about x so I can care more about y?" At his previous company, a creative agency, he had used freelancers in cities like Austin and Phoenix, where the going rate for their services was cheaper. He decided to try staffing his startup, InVision, on the same basis.

It worked. So well that InVision is now valued at $1 billion. Its workforce of 800, up from fewer than 500 a year ago, is still all-virtual, and Valberg has no plans to change that.*

This sort of thing feeds an endless stream of speculation about which up-and-coming city with an educated workforce, abundant broadband, and cheap commercial rents might be "the next Silicon Valley." Will it be Austin? Detroit? Kansas City? Toronto?

But there's a reason Amazon snubbed the other 235 cities that entered the absurd competition to host "HQ2." They might have software engineers, but they don't have vast numbers of software engineers--the kind of talent supply that can feed a company that was adding 5,000 jobs per year in Seattle before looking elsewhere.

For now, then, the biggest tech companies will channel their growth into the handful of cities that can accommodate such numbers. Which means those cities will continue to grow ever more inhospitable for startups.

Early-stage startups can't compete with profitable Goliaths on salary. Historically, they've met that challenge by offering generous equity packages that can make early employees spectacularly wealthy. But even the most risk-tolerant people have to sleep somewhere and feed themselves, and doing that in Mountain View, California or Manhattan or Seattle without a six-figure salary is almost impossible.

"Equity packages don't pay the rent," says Wade Foster, CEO of Zapier. "That's why you're seeing so many startups starting to talk about what's our non-Silicon Valley strategy? Is it a second office? Is it remote?"

For Zapier, which automates inter-app workflows, going remote made sense because, when the company was getting started in 2012, one of its founders was living in Missouri while his then-girlfriend finished law school there. Over time, Foster says, they realized being distributed was allowing them to tap into a broader, richer talent market than they ever could by confining hiring to one locale, even a tech hub. "We realized this could become an advantage for us," Foster says.

To play up that advantage, in 2017, Zapier began offering a unique perk: a $10,000 "delocation" package for employees looking to leave the San Francisco Bay Area. It was a clever piece of management--it's hard to quit the company that let you take your Silicon Valley salary with you to Charleston, South Carolina--and an even more brilliant piece of marketing. Job applications for all types of roles at Zapier went up by 50 percent afterward, Foster says.

Going all-remote does have its complications. To the degree that hiring and--especially-- fundraising run on informal networking, it still helps to make the scene in SoHo or SoMa. But with each new megacampus, the math gets clearer: For startups that can make it work, ditching geography altogether is a way to enjoy the best of both worlds--a deeper and cheaper talent pool.

"Back in 2012, I would get emails from people like, 'That's weird, that's different, that's kind of crazy,'" Foster says. "Now, the emails I get are from founders and VCs asking 'How do you pull this off?'"

*Correction: An earlier version of this story cited an incorrect figure for InVision's 2017 headcount. The current employee total has also been updated to reflect the most recent figure.